by Simon Black, Sovereign Man:
Every single month, the US Treasury Department is legally obliged to publish monthly financial statements to the public.
This is typically a pretty boring ritual which attracts minimal fanfare; few people pay attention, or even care to look at the federal government’s accounting of its assets, liabilities, income and expenses.
Yet yesterday’s financial statements were pretty groundbreaking, as they showed that the US federal government deficit so far this fiscal year is an astonishing $1.7 trillion.
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Bear in mind we’re only halfway through the fiscal year (which began in October 2020). So there’s a lot more red ink to follow.
That $1.7 trillion deficit figure doesn’t even include a lot of recent and pending legislation, including COVID relief, infrastructure, and all the other fantasy spending bills the Bolsheviks are putting forward.
Now, rather than focus on the headline figure, I’d like to take you on a quick tour of the federal debt today and have an objective discussion of what lies ahead.
First off, it’s important to understand that when the federal government goes into debt, it does so by issuing bonds; bonds are financial securities (like stocks) which entitle the holder to be repaid with interest.
US Treasury securities typically conform to a handful of different types. There are Treasury “Bills”, often called “T-Bills”, which have a very short term and mature within 12 months.
So investors may buy, for example, a 28-day Treasury Bill, which means the government has to repay that debt in less than a month.
Then there are Treasury “Notes”, which mature between 2 and 10 years. The 10-year Treasury Note is the most prominent of these; investors receive periodic interest payments for the life of the security, and after 10 years, the government must repay the debt.
The last category are Treasury “Bonds”, which have terms beyond ten years. The most prominent of these is the 30 year bond.
Now, typically whenever any Treasury security matures, investors have the option of being repaid… or simply rolling their principal and interest over into a new bond (or note, bill, etc.).
And this is typically what very large investors like banks, pension funds, and foreign governments tend to do.
But there’s been a very alarming trend over the last 10+ years, ever since the last financial crisis in 2008: foreign governments and central banks are buying fewer and fewer Treasuries.
In mid-2008, foreign central banks alone accounted for roughly 32% of US Treasury ownership; in other words, these foreign central banks owned about a third of the public debt of the United States.
Today that ownership has dropped by half, down to just 16%.
Now, some people might rejoice and think it’s a great thing that the United States doesn’t owe as much money to foreigners. But this is flawed logic.
Foreigners don’t own as much US government debt because it’s no longer attractive to own. Interest rates are at record low levels; the 10-year Treasury Note is currently just 1.6%. And last summer the rate was as low as 0.5%.
This means that anyone who bought a 10-year Treasury last August (and holds it until maturity) will earn a measly 0.5% per year for the next decade.
Yet simultaneously the inflation rate in the US, even if you believe their monkey math, is nearly 2%. And it’s likely to go much higher.
So you’re earning a fixed rate of 0.5%, but losing 2% or more per year from inflation. This means that, after adjusting for inflation, the poor sucker who buys a 10 year Treasury is losing money.